Exiting the Eye of the Storm

[Ed. note: This is an interview of Doug Casey by Louis James, both of Casey Research.]

L: So, Doug: London has suffered more damage from recent rioting than from
anything else since the Blitzkrieg; the stock market had its most
volatile week in years; gold shot well north of $1,800; and the U.S.
government almost crashed into its debt ceiling. Smells like blood in
the streets. What does a street fighting man like you make of all this?

Doug: Well, it was about 40 years ago in 1971 [laughs] when I read Harry Browne’s first book, How to Profit from the Coming Devaluation.
In that book, Harry said that if gold went as high as $200, it would be
a sign runaway inflation was coming, and readers might need their
survivalist retreats, etc. He was actually right about everything he
said in the book, and for the right reasons, but things didn’t get as
bad as quickly as Harry thought they would.

That just goes to show
that if you predict any particular number or outcome, you should not
say when it will happen, or if you predict a time for important events,
you should not say specifically what will happen.

Anyway, I’m very
uncomfortable predicting serious gloom and doom for two reasons: One,
most individuals intuitively look out for themselves by producing more
than they consume and saving the difference – so the amount of net
wealth in the world grows. Two, technology continues to improve –
Moore’s Law and all that.

L: I’ve heard you say that before, but you’re the guru, so you don’t get off so lightly. What do you feel comfortable telling us?

Doug:
My sense is that we are definitely exiting the eye of the storm at this
point, and we’re heading back into the raging winds of financial,
political, and social turmoil. The riots you see now are just an
indicator of what’s ahead – an appetizer… hardly the main course.

L:
That’s a pretty bold statement, Doug. We’ve been talking about the
so-called recovery really being nothing more than the eye of the
financial storm that hit in 2008. But the U.S. and other governments
around the world have been able to animate the corpse of the 20th-century
economy and keep an appearance of life in its zombie motions longer
than we thought possible. To say we’re exiting the eye of the storm
implies that zombie is going to stop moving and the smell of decay will
soon overpower everything else. Are you ready to make that call?

Doug:
You’re asking me to do what I just said was unwise: to say both what
and when. But yes, it does look grim to me. With the markets fluctuating
so wildly, the Dow going up and down hundreds of points per day, that’s
very likely to spook the government, investors, business managers, and
consumers even more than they already are. Normally I don’t pay much
attention to consumer confidence; it’s an emotional state, and emotions
can change in a New-York second. But at this point the economy rests on
nothing more substantial than confidence. It’s a confidence game. And
confidence can blow away like a pile of feathers in a hurricane.

L:
So what we’re looking at is not just a bump in the road. It’s going to
change priorities and marching orders for market participants – and for
those who interfere in the markets in various ways.

Doug:
Yes. It’s the kind of thing that accelerates a negative spiral, in good
part because everybody wants the government to “do something,” in the
idiotic belief that it can improve things by doing more. Actually it can
only help by doing less.

L: So… the economy
slows more. Why can’t the government reanimate the corpse one more time,
turning up the juice on the stimulus heart-shock paddles?

Doug:
They’ve already created trillions more currency units. Most of these
are currently sitting in banks rather than circulating. That’s partly
because people are afraid to borrow and banks are afraid to lend, but
also because the Fed is paying banks interest to keep what are
considered to be excess reserves locked up. So these trillions of
dollars that were created to bail the banks out are sitting there, but
they’re not going to sit there forever. Once those dollars start
circulating in the economy, prices will rise rapidly.

The other
way for prices to really explode would be for the foreigners holding
some six or seven trillion hot-potato dollars to start dumping them.
With the U.S. government clearly unable to deal with its debt and the
consequent credit rating downgrade – which was both inadequate and long
overdue – those foreigners are getting pretty nervous holding dollars.
Almost any sort of financial calamity could spook some central bank into
exiting its dollar position wholesale. And once one of them starts, the
race will be on, because no one is going to want to be left holding the
bag.

These are two time bombs that are ticking away right now –
the trillions of dollars outside the U.S. that could come pouring back
in, and the trillions of dollars inside the U.S. that were created to
paper over the leading edge of the storm. Either of those things could
bring on the end of the dollar as we knew it, and both may well happen
at once.

L: Okay … But the state has been very
good at convincing people to pay no attention to the man behind the
curtain. If the markets settle down, why can’t people go back to
imagining that everything’s fine?

Doug: I’m not
sure that many people really ever believed there was a recovery under
way. Wall Street acted like there was – but only somewhat, since banks
never started lending again. But unemployment has remained high; it’d
actually be about twice the official 9% level, if it was calculated the
same way it was 30 years ago. And outside of the price collapse of
certain asset classes – like real estate – the cost of living has
increased greatly for most people; the calculation of the government’s
CPI is as corrupt as its unemployment numbers. I think it’s a mistake to
talk about a double dip in the economy; we entered the Greater
depression in 2007 and are still in it. A “jobless recovery” is not a
recovery. The only thing that’s recovered is the stock market, to some
degree. Aside from government hocus-pocus, the mirage of corporate
earnings, and foolish investors wanting to believe it was safe to get
back in the water, things have not gotten better. And they are about to
get much worse.

L: That may be so, but the
government, the press, and corporate America have all been talking about
a recovery. With the Fed promising easy money, if the markets calm
down, couldn’t the illusion of recovery be reestablished?

Doug:
I don’t think so. The economy isn’t going to stay in the eye of the
storm for much longer. The stab of panic we saw last week gave lie to
the emperor’s new recovery clothes. It’s not just the losses on the
stock market, but gold hitting significant new all-time highs in nominal
terms, and Bernanke saying that the Fed would hold interest rates close
to zero for another two years. That’s huge – and a huge mistake. It
tells me that Bernanke has truly panicked. The impact this will have on
the dollar cannot be overstated; it’s a guaranteed disaster. It assures
that people will do all sorts of things they would not do without that
artificially easy money.

L: Okay, but if they go
into debt to buy houses and cars, they’ll create jobs and there will be
more appearance of recovery, won’t there?

Doug:
That’d just be digging the hole deeper at this point. What needs to be
done is to let the market raise interest rates, to encourage savings –
the accumulation of the capital needed to start moving forward on a
solid basis. Instead of encouraging people to work, spend less than they
make, and save the difference, these low interest rates encourage
profligacy. They encourage people to liquidate savings and live above
their means. As usual, the government isn’t just doing the wrong thing,
it’s doing the exact opposite of the right thing.

L: Because...

Doug:
Because of the false belief that printing money stimulates the economy.
The artificially depressed interest rates of today will result in very
high inflation and very high interest rates in the near future. A
healthy economy gets naturally low interest rates as a result of a lot
of savings, a lot of capital creation. A healthy economy has stable
interest rates that relate to the amount of new wealth being created,
typically just above the natural rate of inflation that results from
real money – gold – being mined out of the ground. Artificially low
interest rates stimulate malinvestment.

The Fed is also
keeping rates low because of the government’s massive debt problem. The
U.S. is already running trillion-dollar deficits – if interest rates go
up, say, to 12% like back in the ‘70s, that would add another trillion
to the deficit right there. Financing a $16 trillion debt at 12%, rather
than 2%, equals another $1.6 trillion of spending – just for interest.

This
really means they have no choice. The situation is completely out of
control – the U.S. financial house of cards is irredeemable at this
point, even with interest rates at close to zero. The whole financial
structure is close to collapse, and that’s why I think we’re exiting the
eye of the storm.

L: The Titanic has been struck, but Captain Obama just doesn’t yet realize how badly?

Doug:
Exactly. And – adding insult to injury – not only are they doing the
opposite of the right thing, they are actively punishing people who did
the right things, who worked hard and saved. Pensioners living on fixed
incomes are being forced to reach for higher and higher yields, which
means they are being forced to put their nest eggs into riskier and
riskier investments. This guarantees that the pensioners and the savers
will be wiped out.

L: Unless they put their savings into gold.

Doug:
Sure, but nobody but crazy goldbugs even thinks about that. And it gets
worse: The current course guarantees the total destruction of the U.S.
dollar. Again, I cannot emphasize enough how serious this is. People all
around the world save in dollars. If the dollar is destroyed, it won’t
just be Americans who’re hurt, it will be all the hard-working people
around the world who’ve struggled to scrimp and save and put money away
for future needs. All these people who were wise and frugal, they are
going to be wiped out. They are going to be left with absolutely
nothing. This is criminal – it’s the stuff revolutions are made of. And
that’s exactly what I expect we’ll see plenty of, all around the globe.

L: Seems so clear – what could they possibly be thinking?

Doug:
Perhaps Bernanke’s making the same mistake people with maxed-out credit
cards make, when they think hyperinflation will wipe out their debts.
They forget how nasty, brutish, and short life can be in a society in a
hyperinflationary collapse. And think about it: What happens if you wipe
out these debts? Who are the debtors? They are the most profligate
people in society. So these artificially low interest rates reward the
most irresponsible and punish the most responsible people in society.

L: Absolutely perverse.

Doug: [Chuckles] Took the words right out of my mouth.

L: Easy enough to do in this case.

Doug:
Well, there’s your answer. What’s going on now really is creating the
foundation for revolution, and not just in the U.S. The riots in London
and Chile, and other outbreaks of chaos around the world aren’t
anomalies – they’re a warmup. An overture before the symphony starts.
Things will be especially bad in British and European cities, where
there are millions of people who’ve never worked. Ever. They’ve just
lived off the state.

L: Maybe we’ll hear the music on November fifth.

Doug: “Remember, remember, the fifth of November…” That would be interesting indeed. Readers should rewatch V for Vendetta to put them in a proper frame of mind on how serious things are. I mean… it is going to be a time when Street Fighting Man will be a most appropriate theme song. Turn up your speakers.

L:
I agree with you, Doug, but I have to say it makes me a bit nervous to
come out and say we’re exiting the eye of the storm. The powers that be
have proven far more adept at keeping the balls they are juggling in the
air than I ever thought they could be. Every time I think it can’t get
worse without things coming apart, it does get worse, and somehow things
don’t come apart, they keep going.

Doug: Of
course. As I started out saying, Harry Browne’s prediction 40 years ago
was essentially the same that I’m making today. Harry was a bit early –
and I was too, in 1980. But this time really is different, with so many
unprecedented actions and reactions between the market and the state. I
truly see no way out for the state this time, and it’s going to be much,
much worse than it would have been had it collapsed back then. I can’t
say for sure exactly when things will fall apart, but I’m more convinced
than ever that they will, and that we are about to plunge deeper into
the Greater Depression.

L: What if you’re wrong?

Doug:
I honestly hope I am, because if I’m right, the global economic
devastation is going to have a very real and significant death toll. The
price in human suffering these fools in government are setting us up
for is truly monstrous. As a human being, of course I’d rather see good
times.

L: But as a speculator…

Doug:
Yes, as a speculator, I know the crisis will create phenomenal
opportunities. If we lived in a stable society, with a stable monetary
order and a non-predatory government, it’d be impossible to be a
reliably successful speculator, because there’d be few or no politically
induced distortions in the economy to take advantage of. So, always
looking on the bright side, we can look forward to many new bubbles to
result from the state’s massive interventions today and in the future.

L: Such as?

Doug: There will be a huge bubble in gold ignited, and maybe soon. That seems pretty much baked in the cake at this point.

L:
That’s interesting. A lot of people say gold is already in a bubble –
that the recent surge up to $1,800 per ounce is a sure sign of that. But
you’re saying it hasn’t even started yet?

Doug:
Well, I hate encouraging people to buy gold at $1800 an ounce, because
that level is already more than 700% above the bottom in 2001, and I’m a
bottom fisher. I like bargains, and I can’t call gold a bargain today.
But it’s plain as day that gold is going to go higher. There’s simply no
other place for people to try to safeguard their wealth as the dollar,
euro, and other currencies plummet toward their intrinsic values. What
else could people buy as they get more and more afraid of paper
currencies losing acceptance? What are corporations going to do with the
billions of dollars in their treasuries when their management gets
frightened? Where else can they go when they need to get rid of dollars,
euro, yen, and yuan? Central banks, too – what will they do when they
need to dump dollars in favor of something that will hold value?

This
is why I see a bubble in gold still ahead. It has nothing to do with
the supply and demand for gold in the jewelry trade, or whatever – it’s
going to be a result of there being no viable alternatives when the
paper-money con game is over. Gold is the ultimate cash, and that’s
where people will go when there’s a global, total, panic to cash.

L: Agreed. Other investment implications?

Doug:
Gold mining stocks. Most good ones aren’t bargains, even though they’ve
been lagging gold in recent trading, maybe because of the fear in the
marketplace. But they’re going higher.

L: Of the
two major forces that drive markets, greed and fear, which do you think
will predominate going forward? Because there are different buying
patterns, depending on whether it’s greed or fear in the driver’s seat…

Doug:
You’re quite right. I think it will be a market driven primarily by
fear for some time, and that will favor profitable producers, emerging,
high-margin production stories, and maybe the best of the best explorers
advancing projects with obvious merit towards production. Nobody buys
the risky junior exploration plays when fear is driving the market.

L: Except a bottom fisher.

Doug:
Except a bottom fisher, yes. There will be some fantastic opportunities
in earlier-stage exploration companies that will get smashed because of
fear. But speculators looking for those have to be patient. Many junior
explorers will dry up and blow away during the fear-induced drought.
Eventually, the best will come roaring back when the bubble inflates and
the real mania phase of this bull market kicks in. Then, everything
with “gold” in its name will trade at ridiculous premiums, even the
crappiest juniors whose only gold is in their name.

L: How long before greed kicks back in?

Doug:
There you go asking for a time as well as a prediction again. I don’t
know, but it could be a while: A lot of greed has been washed out of the
system with the big panic of 2008, the real estate collapse, and the
stock market really going nowhere for the last ten years. Plus, when the
bond market collapses, as I think it will, that will be the final blow.
That’s really The Big One on the horizon these days – the bond market
is three times the size of the stock market, so a major reversal there
will cause enormous damage.

L: So, stay away from the junior explorers?

Doug:
Just the crappy ones – and as you well know, 95% of explorers have
nothing and never will have anything. But there are some which actually
have gold or silver in the ground – or clear drill indications that they
are close to being able to report having such assets – the kind you
specialize in finding for the International Speculator. Those
stocks are going to benefit from the flood of money hitting the precious
metals sector. Remember, the whole gold market is trivial in size. It’s
only a tiny fraction of the oil patch, and not even a rounding error
compared to the global market. When the average investor wakes up to the
need to own gold for safety and the potential profit from owning gold
stocks for leverage to gold, it’s going to be like trying to fit the
contents of the Hoover Dam through a garden hose. Prices will go
ballistic, and there will be plenty of money hitting even the smaller
juniors that have good stories.

L: Good reminder about safety.

Doug:
And that’s another factor that will be driving the price of gold: It
won’t just be speculation, it will be prudence – the flip side of fear.
Prudence will drive people into buying more physical gold. Greed will
drive people into gold stocks. I own a lot of physical gold already, but
I’m still buying, even at these levels. And I own a lot of gold stocks,
but I’m still accumulating those too, when we dig up good
opportunities.

I look forward to seeing the pictures I know you’ll
take on your next rock-kicking expedition, trying to dig up one of
those good opportunities. ‘Til next time.